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Dow Theory Update For Nov 19: False Signal Or Short Squeeze?

|Includes:DIA, GDX, GLD, IYT, SIL, SLV, SPDR S&P 500 Trust ETF (SPY)
No change in trends.

Let's get started with our Dow Theory commentary for today.

Today the markets were on a bullish note.

The three stocks indices we monitor close strongly up.

Volume was much lower today, which has a bearish connotation, since it was an up day. Furthermore, the last recorded pivot low had lower volume than that the preceding one (see chart below) which is bearish too. Thus, volume seems to suggest that the bear is holding the upper hand.



Last pivot low bearish. Overall pattern of volume is bearish

However, today's market action hasn't changed either the primary or secondary trend which remains bearish for stocks.

Of course, it goes without saying that it irks me that a primary bear market signal was flashed by just some cents. Should the Transports have closed just 1 point higher we would be in a primary bull market (at least according to my Dow Theory "flavor") and hence we would have enjoyed today's up move.

However, we must bear in mind that:

1) We must have discipline to stick to a sound timing method such as the Dow Theory. If we begin to break solid rules, we will be ultimately doomed. We simply don't know what the market is going to do on a given day. However, we do know about odds. And we know that if a primary bear market has been signaled (even by some cents penetration) it is a valid primary bear market signal to be heeded. Ignore it at your own peril.

2) Aprioristically, the rules of the Dow Theory make sense. We know that trends exist. Furthermore, as Dow greatly explained in his writings, there are fundamental and psychological reasons for its existence. Thus, once the market has shown a definite degree of weakness (i.e. violation of secondary reaction lows), the most likely outcome is the continuance of such a trend. A couple of quotes from Charles Dow are illustrative in explaining the existence of trends:

On February 21, 1901, Dow wrote:

"But after allowing for all these things, it is fair to assume that the trait in human nature which makes cycles in trade has not changed and that it will work out the same over-trading and over-commitments which have been the cause of declines heretofore."

On July 31, 1901, he wrote that:

"the tendency to over-do in times of prosperity rest on a principle in human nature, which makes a man always want to make money, no matter how much he has made."

Thus, trends exist and the investor is long term better off not fighting them.

Therefore, even if this primary bear market signal resulted in missing profits as the market shoots up and makes new highs, we should find comfort in knowing that on the long pull we are going to outperform slightly the market, while, more importantly, keeping losses short. What kills investors is not a lack of performance but draw downs. Fear is more important than greed and thus, our first task is too keep losses short, even if this entails occasionally foregoing profits. You can find more details about the primary bear market signalhere and here

Gold, silver and their respective miners ETFs closed up for the day. For the time being, it seems that gold and silver are not violating their 11/02/2012 secondary reaction lows. By refusing to break such lows, a primary bear market signal is being avoided. Thus, the primary trend remains bullish and the secondary trend bearish.

The miners continue in a secondary reaction. The primary trend remains bullish.


The Dow Theorist